Overview of Validators in the Terra LUNA Ecosystem
Security and stability are critical to Terra Protocol. Validators are foundational to achieving both.
Validators satisfy these needs for the entire Terra ecosystem.
Staked LUNA tokens are critical to producing new blocks on the blockchain and validators complete the task of block production by running a full node.
These nodes are a software program that validates transactions and blocks of blockchain. Staking tokens are essentially a safety deposit on validation activities.
Validators with the most LUNA staked (delegated) to their operation are more likely to be chosen to produce the next block.
Being selected to produce blocks matters because validators and their delegators are rewarded by revenue earned from various fees and burning of LUNA tokens at the end of each block created.
Becoming a validator can be done by any network participant, however, it must be noted that doing so is not without significant responsibilities and meeting several requirements.
Terra Protocol states that validators have four main responsibilities:
- Run the correct software version — servers are constantly online, absolutely no time offline
- Participation in price discovery and stabilization — report accurate market prices of LUNA, and keep Terra stablecoins stable
- Contribute to the deployment of community pool funds — participate in the Terra Protocol governance systems
- Be active participants in the community — vote on proposals, provide oversight and feedback when needed
Technical requirements to become a validator include hardware, software, and managerial aspects.
Validators are expected to have their operation constantly online, meaning they need to ensure their equipment is functioning properly and measures are in place so there is never a lapse in operating a node.
A validator is a team of highly skilled individuals that make sure the node will run without any issues. Running an effective operation will prevent the validator, or its delegators, from being penalized — also known as slashing.
The reputation of a validator must be built and sustained if they are to attract more delegators, thus amplifying revenue earned from work.
A validator may very well stake their LUNA tokens, known as self-bonding, however, it is not required by any means. A validator’s total stake is comprised of any self-bonded LUNA and its delegated stake.
Terra Protocol outlines in their documents some criteria a LUNA holder may follow to help select the proper validator for them. Terra suggests considering the following:
- Amount of self-bonded LUNA — the amount of LUNA a validator staked to itself
- Amount of delegated LUNA — this shows community trust for this validator
- Commission rate — this takes away from revenue before it is distributed to delegators
I would like to personally recommend to go a step further and look into a validator’s Twitter page, join their Discord or Telegram groups, view their website, perhaps even their Medium page if they have one. Is the team doxxed? If you needed to, could you contact them?
If a validator meets requirements a LUNA holder may have, said holder will have trust in the operation’s team. The holder will be more inclined to delegate tokens and be able to do so with reduced fear of enduring slashing consequences.
It should be noted that a validator cannot “runaway”, or steal delegates’ LUNA tokens, but there are consequences if validators misbehave. This is what Terra refers to as slashing, and these are essentially penalties earned when responsibilities and requirements are not satisfied.
What happens when a validator misbehaves? The staked LUNA tokens, provided by delegators and validators alike, will be slashed, meaning a portion of staked LUNA will be lost. This occurs only when a validator double-signed on a chain, is unavailable for some reason, or the validator did not vote on a proposal.
Not all validator misbehaving is intentional, accidents do happen, further demonstrating why validator operating teams must be prepared to avoid accidents at all costs. It is also equally important that delegators understand the role they play in performing proper due diligence before delegating their tokens.
When all goes as planned, validators are operating smoothly, the rewards are plentiful. Terra has outlined several types of rewards validators and delegators may earn:
- Compute fees — gas fees accumulated from transactions that are disbursed to participating validators at the end of each block
- Stability fees — small fees generated from each Terra transaction, that is paid in any Terra currency that is disbursed at the end of every block
- Burning rewards — Involves the Exchange Rate 0racle
- Swap fees — fees generated from swapping transactions of LUNA and Terra that are burned creating scarcity, thus rewarding validators indirectly
Revenue given to each validator is distributed among delegators within that validator’s pool. Validators earn more revenue than their delegators thanks in part to commissions, which is a set percentage applied to the revenue that goes to delegators.
In summary, Terra Protocol would not be able to function if it were not for staked LUNA from delegators, and validator operations utilizing the staked tokens to run these nodes. Each participant partakes in a critical feature of the ecosystem.